BLACKROCK: How Investors Can Limit The Impact Of Bad Behavior On Their Portfolios

Friday

Apr 11, 2014 at 9:02 PM

Mamta Badkar

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How To Limit The Impact Of Personal Experiences On Investing Behavior (BlackRock Blog)

Personal experiences can weigh on an investors' risk taking behavior and their expectations about the future, writes Nelli Oster an Investment Strategist in BlackRock's Multi-Asset Strategies Group. This often prompts investors to repeat behaviors that resulted in good outcomes and vice-versa but in doing so they stand to lose miss out on things that can help future performance.

Oster suggests a few ways in which investors can limit the adverse impact such behavior can have on their portfolio. " Key here is broadening one’s horizons, starting with an awareness of our tendency toward the personal experiences bias," Oster writes. "More specifically, individual investors and advisors would want to consider deliberately lengthening the time period on which they are basing their return and risk assessments to include different macroeconomic and market scenarios."

She recommends scenario and stress testing portfolios for different environments. Oster also "advocate(s) using a rules-based or systematic investment methodology, whether simple quantitative screens or full investment models built to predict fair values, to help construct a portfolio."

Jared Watts, portfolio manager for Morningstar Investment Management, thinks that ETFs and index funds tend to be more tax efficient than actively managed products. "The ETFs are more tax-efficient, simply because of the design where they have the ability to basically neutralize some of the tax impact that an active manager or mutual fund would not be able to do since they are required to make a distribution once per year," Watts told Morningstar's Christine Benz.

"ETFs have more flexibility in the overall timing of when that would take place just through the buying and selling of the underlying shares. So it's more of a structure type of difference between especially active mutual funds and ETFs." But it's important to remember that you could still be taxed when trying to sell these instruments.

Trading Volume's Bad For Share Prices (Business Insider)

"The stock market and trading volume have not been on friendly terms in recent years," Jeff Kleintop at LPL Financial told Business Insider. "In fact, over the past five years' low-volume days (when stock trading volume is below its 50-day moving average) stocks have generally gone up, as you can see in Figure 1. Conversely, when volume is above average, stocks have generally been flat to down."

"When it comes to volume, be careful what you wish for. A common criticism of the bull market in recent years is that buyers do not have a lot of conviction because volume has not been strong. The implication has been if volume does not pick up, the market may decline. However, the past few years show the opposite: that markets climbed on relatively quiet trading for long stretches of time and then briefly pull back as volume jumps."

Investment managers are largely optimistic on U.S. economic fundamentals, according to a quarterly survey of 100 managers conducted by Northern Trust. 89% of those surveyed said there is "a small to modest probability (under 25 percent) that emerging markets challenges will spread to developed markets." Meanwhile, 79% said weak economic data is temporary and expect better data in Q2. Just 11% said "financial market volatility and a slowing rate of economic growth in emerging markets create a significant risk of contagion for developed markets."

In terms of asset classes, managers were most bullish on U.S. large-cap equities and non-U.S. developed market equities. They were most bearish on U.S. fixed income, cash and non-U.S. bonds. "Investment managers expect continued improving fundamentals within the U.S., supporting their bullish view on U.S. equities, despite less favorable valuations,” said Mark Meisel, senior investment product specialist of the Multi-Manager Solutions group. "When asked about investing in emerging markets, 41 percent of managers said there are still too many uncertainties and 27 percent responded that fundamentals do not support their current valuations."

We Saw A Capitulation Into Emerging Markets This Week (Business Insider)

Emerging market stock and bond funds saw their assets under management rise by $2.9 billion in the week through April 9, according to new data from EPFR. This was the biggest combined inflow in over a year. Michael Hartnett, chief investment strategist at BofA Merrill Lynch, said we saw a "capitulation back into EM," this week.

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